Sunday, November 23, 2014

Punishing debt sinners, Angela Merkel style

Yannis Varoufakis got into a war of words over a historical analogy with Klaus Kastner, the analogy in question being whether their is a meaningful Versailles Treaty parallel in the relations between Germany and the "periphery" countries in the eurozone. Varoufakis has been featuring the dialogue on his blog.

Policy-by-analogy is a tricky exercise that often produces more confusion than clarity. But both Varoufakis and Kastner both make some important points relevant to the current situation in the process of this little polemic. In this one, Kastner addresses the Merkel notion of punishing sinner nations for debt higher than what Her Angie-ness approves (Klaus Kastner replies – On the Versailles Treaty parallels 11/19/2014):

I don't believe in ‘crime & punishment’ when it comes to financial restructurings. For the simple reason that it doesn’t work. On several occasions, I have participated in ‘bankers’ meetings’ where we bankers faced a borrower who had literally taken us for a ride. Who had terribly cheated us. Where our gut told us to drive his company into bankruptcy and to send him to jail. And when reason returned, we had to recognize that we would only be shooting ourselves into the foot. When the borrower is a corporate, the ‘shooting in the foot’ is easier to recognize because the corporate can go bankrupt. When the borrower is a sovereign and since there are no bankruptcy laws for a sovereign, the ‘shooting in the foot’ is often not recognized at first. In the long run, the foot will be shot. Any financial restructuring has to be an unemotional give-and-take if it is to work well.

Tim Geithner is now on the public record, confirming that which we have always known: In February 2010, clueless as to the Euro Crisis that was about to engulf them, Northern European leaders decided to crush Greece. Collectively to punish (against even the Geneva Convention) a nation for having gone bankrupt within a Eurozone whose architecture never took into consideration the possibility that a member-state could become insolvent. ...

The rest is, of course, history. Greece was crushed. And it was crushed not by letting it default but, instead, by imposing the largest loan in history upon its weakened shoulders on condition that it should forfeit 30% of its nominal (euro-denominated) GDP. In the process, the rest of the Periphery (where the ‘Crush Greece’ model of crisis management was exported) was fiscally waterboarded with the result that the Eurozone came to the brink and, once Mr Draghi intervened, entered a long, slow-burning debt-deflationary spiral from which only fragmentation and discord can spring. [emphasis in original]

Kastner in Klaus Kastner responds to the Geithner revelations, and my Versailles Treaty allegory 11/14/2014 cites a 1992 piece from the French Le Figaro to argue that in one sense, the Maastricht Agreement creating the EU was a kind of new Versailles Treaty that imposed costs on Germany. "All I am saying is that huge costs will hit Germany once they can no longer be covered up. And they cannot be covered up forever, that's for sure!," he writes.

This is why I am arguing that Kastner is wrong: Maastricht was not imposed upon a weak Germany. The opposite happened. Once the inane illusions of the French elites (that they would remain, in de Gaulle’s words, the coachman while Germany is the horse) had been ruthlessly crushed by the Bundesbank (giving rise to a slow burning permanent recession in France – which has been strengthening the National Front on a permanent basis), only then did Germany accept Maastricht, making sure that it would work beautifully in its own national interest. [my emphasis]

The problem is not, of course, that the eurozone works in the national interests of Germany. It should work in the national interests of all member states. The problem with Merkel's particular brand of Herbert Hoover/Heinrich Brüning economics is that it is a highly nationalistic policy that benefits Germany at the expense of its eurozone partners. At the very high expense of the peripheral countries.

He gives this brief historical sketch:

More precisely, the Eurozone operated as a single currency within which German surpluses would grow inexorably helping its larger corporations to fund their globalisation drive. Part of the surpluses German companies extracted from the deficit Eurozone countries were used to build capacity in China, Eastern Europe, the United States and Latin America. The rest of these surpluses were exported by German banks to the Eurozone periphery funding ponzi growth (real estate in Ireland and Spain; and in the public sector of Greece) which fed, in turn, demand for BMWs and Mercedes-Benz.

And when these bubbles (caused by vendor-financing provided by the German banks to the periphery) burst, the bailouts that followed were nothing more than predatory loans for the purposes of ensuring that Irish banks would not default (as they should) to German bondholders and that Greece would not burn a hole in the books of Deutsche Bank etc. That some of these losses will be passed on to the German taxpayers, after years of ultra low bund yields and a massive flow of capital to the periphery to the Frankfurt banks, can hardly be thought of as a new Versailles imposed upon... Germany. [my emphasis]

And Varoufakis makes this extremely important point in the last paragraph of that post: "A rational Europe should never have imposed, and a virtuous Greek government should never have agreed to, the predatory loans also known as the Greek Bailout."

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Johann Gottfried von Herder (1744–1803)

Herder developed a philosophy of history in which he focused on the prominent ideas of historical eras, that he held to be fundamentally shaped by the successive historical stages leading to improvements in civilization. He also developed theories of language anticipating 20th-century linguistics. "Instead of seeing [language] as an assemblage of signs co-ordinated with things, [Herder saw it] rather as the necessary embodiment of a certain form of consciousness, which in this case is that form in which there are such things as signs for us." (Charles Taylor)